Producers across Asia are beginning to see signs of improvement in prices and demand, but they still have a long way to go before the celebrations can start

Picking up the pieces of Asia's paper industry

For example, there has been overcapacity in the woodfree market, while Korean printing and writing paper producers have been forced to give hefty discounts and kraftliner importers have been getting elbowed out of the market in favor of local testliner producers. Fortunately though, clear signs of a market rebound are starting to emerge. The key questions now are how quickly the recovery will develop and can the turnaround be sustained.

Adding up

GDP growth projections for 1999 to 2001 show strong numbers across the Asia Pacific region (Table 1). Most countries seem set to go from strength to strength, although China's GDP is likely to remain relatively steady at around 7%. The positive economic news is leading the industry to expect rising consumption and higher production levels in most Asian countries.

As Charles Spencer, Asian paper analyst at Morgan Stanley Dean Witter, explains, "GDP growth in non-Japan Asia is expected to grow at 7-8% this year and next. Based on the historical relationship of paper consumption to GDP growth, we would not be surprised to see 10% paper consumption growth with an upside surprise for even greater growth if the region's inventory rebuild continues. Evidence of this strong recovery is clearly being seen in Korea where newsprint consumption was up 20% last year and we estimate another 15% increase this year."

Overall, economic growth and currencies look reasonably strong, consumer confidence is returning and paper markets appear to be on the rebound. "There are still some things to be ironed out," says Spencer. "For example, Thailand's banking system and the possibility of a slowdown in China." But he remains upbeat, pointing to the strong numbers coming out of southeast Asia, the sweeping changes in Indonesia and the fact that China is not deflating as quickly as in the past.

The economic tide can of course turn very quickly and there are always risks to bear in mind. For example, investors continue to approach Indonesia with caution due to the country's social and political upheavals. For 1999, Indonesia's GDP growth is expected to come in at just 0.2%, way behind the other countries in the region. But the outlook for Indonesia is more positive going into 2000 and 2001, with GDP growth projected to reach 3% and 4%, respectively. China is also a risky card, with the possibility of a devaluation of the renminbi lurking in the background.

On the whole though, it is positive economic news that dominates. Industry players are also taking heart from the upward market trends, which are already being felt in Asia's pulp and paper circles. Demand is picking up across the board and in many cases pricing is following suit.

On the price front

Pulp has led the pack in the upward price march in Asia, spurred on by a strong international market and global supply cutbacks. As the worldwide pulp market has become tighter, pulp prices in Asia have continued to creep ahead of other markets. By February 2000, northern bleached softwood kraft (NBSK) had soared to $640-650/ton net in northern Asia and $660-670/ton in China and Indonesia. In the hardwood market, eucalyptus reached $620-630/ton across most of Asia, with China once again commanding the highest levels at $640/ton net for regular business and slightly higher for spot tonnage.

Pulp capacity expansions are also limited, a factor which should help keep the market balanced. At the start of this year, Indonesia's Tanjungenim Lestari brought its 450,000 ton/yr hardwood pulp line on stream. But the market hardly batted an eyelid as the extremely thirsty papermakers swallowed up the extra pulp capacity. The only other major project on the horizon is a second pulp line at Asia Pacific Resources International's (APRIL) Kerinci mill in Indonesia. The group is installing a 450,000 ton/yr hardwood pulp line, with startup penciled in for the end of 2001.

Keeping cool

While pulp appears to be powering ahead with few obstacles in its way, paper and board markets are facing a tougher time. Prices are starting to move up, but at a slower pace. As Norman Waite, paper analyst at Salomon Smith Barney, points out, "Paper prices won't fly yet. Economies are not yet running at full speed and paper suppliers know that their customer base cannot absorb an increase just yet. But it [the gradual price recovery] just slows the trajectory of the upturn, it doesn't derail it."

In Waite's opinion, "The leading edge of the economic recovery is in the packaging grades." Taiwan is going for its second price increase this year for industrial paper packaging grades and local testliner producers throughout Asia aimed to boost price levels during the first quarter.

A testliner increase would be supported by the recent sharp rise in raw material costs as wastepaper prices have moved up steadily over the past few months. Healthy demand and a strong export situation for end-user products, such as electronics and textiles, further strengthens the producers' case for a price rise. But some sources erred on the side of caution, claiming that local suppliers might hold back price increases in an attempt to encourage more corrugators to switch from kraftliner to testliner. Others dismissed the fears, saying that the sharp rise in costs would leave testliner producers no option but to follow kraftliner's example.

Kraftliner prices have already started to rise in Asia. Signs of a turnaround have been seen in the market for several months, but these only translated into higher prices at the start of this year. Most linerboard producers announced a $50/ton price rise for the beginning of 2000. The increase is being implemented in two stages, each of around $20-30/ton.

The first step has been fully achieved, but some producers are still working on the second round. Suppliers were confident that the remainder of the $50/ton increase would be successfully implemented in March. The rise was set to take the average price for 175 g kraftliner to $470-500/ton, c&f.

Sowing the seeds of an Asian recovery

Woodfree worries

The picture is not as rosy for printing/writing grades though, where prices have struggled to move up. The sector is being pushed along by an urgent need to improve margins in the wake of relentlessly rising pulp prices. But at the same time, it is being pulled back by demand levels and a fear of overcapacity.

The Korean printing/writing market has never been far out of the headlines in recent months. Producers continue to take up to five days downtime per month, with discounts going as high as 25%. The situation is improving though, as domestic demand stages a marked recovery. As one investment banker points out, "1998 was a disaster. It [the Korean market] needs time to recover."

On the one hand, domestic demand is improving, which enables producers to raise production levels. But on the other hand, as operating rates recover and new capacity hits the market, the old problem of an oversupplied market returns. Coated woodfree demand picked up between 1998 and 1999 and is forecast to continue rising into 2000. But it appears that supply will increase even faster.

These fears were echoed in a recent market report from Korea's largest woodfree producer, Hansol Paper. The company warned that supplies of coated woodfree paper look set to continue soaring far and above demand levels. The trend is similar for Korea's uncoated woodfree market, but the gap between supply and demand is much less severe.

According to Soo-Hyun Whang, paper analyst at Daewoo Securities, the key to Korea's plight is exports. The country has always relied heavily on export markets, but all the more so since the country plunged into economic crisis. Even now that Korea's domestic consumption is recovering, exports remain high at above pre-crisis levels, Whang explains.

In Whang's opinion, exports will continue to be the most likely way for Korea to win the oversupply battle. But the question remains whether the export markets will be strong enough for Korea to continue offloading its excess products. China is traditionally one of Korea's key export markets and for a grade like duplex board, for example, the answer would appear to be yes. But a question mark hangs over China's ability to import large woodfree volumes, given the new capacity coming on stream in China itself (Table 2).

In January, Asia Pulp and Paper (APP) started full commercial production on its two new woodfree PMs at the Dagang mill, China. According to the company, the machines are now running to at least 80% of their capacity levels. The Dagang launches came hot on the heels of the startup of APRIL's new 350,000 ton/yr uncoated woodfree machine in the second quarter of last year.

In total, an extra 1.25 million tons/yr of woodfree capacity has started up in China during the last 12 months. That's a lot of paper by anybody's standards. With China's economic growth not exactly forecast to surge in the immediate future, some industry observers are asking whether the Asian giant can soak up all this new capacity.

The consensus seems to be that there could well be a few short term worries, with weak pricing in the next three to six months. A look at APP's China pricing actually shows a $70/ton rise between the third and fourth quarters of 1999, but it is not clear how much of the improvement was for base paper. Some sources suspect that the bulk of the rise can be attributed to APP's converted products in China.

Analysts seem confident that it is just a matter of time until the Chinese market adjusts, growth rates pick up and the country closes down more of its older and smaller mills. In the words of Waite at Salomon Smith Barney, "It's a temporary absorbency problem."

Some of the new capacity might have to be exported initially, but the Chinese market should soon be able to absorb the volumes. "The Chinese market is ripe for a woodfree market," Waite adds, referring to a shift in China's demand from inferior to higher quality products. Whether there will be room for high quality Korean imports as well remains to be seen though.

Keep on coming

Even if Chinese consumption is rising, it should be remembered that the floodgates are also opening for a surge of new linerboard and newsprint capacity. Once again, industry pundits are weighing up whether the market can take such large volumes of new capacity.

Companies investing in additional linerboard capacity hope to capitalize on a growing regional trend away from kraftliner and toward testliner. This substitution was spurred on by a rising gap between kraftliner and testliner prices in Asia. The traditional gap is reported to be about $50-60/ton. But by the end of last year, sources said it had widened to $80-100/ton.

In recent years as local boxmakers sought more ways to cut costs in the wake of the region's financial crisis, testliner became an increasingly attractive option. Boxmakers were also forced to turn away from the higher priced kraftliner as they faced difficulties passing on the increases to end-users. Oversupply in the box market also means that the end-user could shop around for cheap boxes, putting extra pressure on boxmakers to lower their prices.

As a result, testliner capacity has been springing up all over Asia. Looking ahead, though, most of the new projects are destined for China. Industry observers seem relatively confident that China will cope with the new capacity, either absorbing it into the domestic market or exporting it to other Asian markets.

In the news

Newsprint is the other grade that is set to take China by storm. Last year saw Nanping Paper bring a new 180,000 ton/yr PM on stream. This year will witness startups at Black Dragon's Qiqihar mill and Guangzhou Paper's Guangdong mill. Most market players are confident that the extra capacity will feed China's growth and not replace imports into the country. After all, the market is blossoming and import restrictions are still in place on US, Canadian and Korean output.

China imposed painfully high import duties of up to 78% following an anti-dumping investigation in 1998. The tariffs will stay in place for five years from 10 July 1998. Despite these measures, one Hong-Kong based analyst referred to China's newsprint capacity as "a definite risk". He questioned who was going to buy the volumes, given the Chinese government's media crackdown, the restrictions on circulation and in some cases the closure of certain newspapers.

A look at Asia's newsprint market from a broader perspective certainly paints a more cheerful picture. The market broke through a significant psychological barrier in January with the region's first price increase since the end of 1997. Suppliers announced a $50/ton increase for 1 January and in some cases this is exactly what they achieved.

The amount of the increase varied according to supplier, customer and market. But most suppliers said prices rose $40-50/ton, with just one source quoting a lower range of $30-45/ton. The increases brought average transaction prices to $475-530/ton, c&f. This covers the 45 g/m‰ to 48.8 g/m‰ weights in most Asian markets, with the exception of Korea and China where prices are reported to be even stronger.

Producers are certainly starting to smile, even if they are not cracking open the champagne just yet. Demand might have been given a slight artificial boost as buyers built up stocks ahead of the January price increase, but the market seems convinced that most of the extra demand is from a rise in real consumption. For example, Singapore's main daily newspaper, The Straits Times, published a 330-page bumper issue on 15 January - the biggest edition in the newspaper's history. And Indonesia is getting a helping hand from the new newspapers, tabloids and magazines that are now allowed to flourish in the "reformation" era.

Few industry observers would argue that the newsprint price increase marked a turning point for the market. But suppliers are also quick to point out that much of the increase was absorbed by rising production costs. The driving force behind the price rise was the newsprint suppliers' urgent need for better returns. But pleas of poor profitability alone did not push up prices. The announcements were also supported by a strong US economy, a fourth quarter price rise in North America and, perhaps most importantly, signs of economic recovery in Asia.

Out in front

The seeds have certainly been sown for a burgeoning Asian market. But it is not yet clear whether the seedlings will be allowed to reach full height or if they will be cut down prematurely. Demand is starting to pick up, prices are recovering for many grades and the overall message from industry observers is one of cautious optimism.

It remains to be seen, though, whether the pessimists or the optimists will win the day.

Stories

Columns